Pricing Strategies to Stay a Step Ahead

Understand the value you provide from the customer’s perspective, and use these strategies to get the highest prices.

Columns Post: 7/21/2011

Mitch Goozé

In my May column, I made the point that it was time to raise prices. I wrote about using material cost increases to justify price increases. Since pricing pressure continues for most shops, this month I’m offering additional strategies for setting or raising prices.

A common practice that is more visible these days than in the past is bundling versus unbundling. The simplest example is the airline industry. In the “old” days, you bought a ticket for a price and everything was included: luggage, food, a seat, and so on. Today, depending on the airline you choose, the fare is for the ticket only. Luggage (even a carry on in the case of one airline), food and preferred seating is extra. The airlines have unbundled their pricing to achieve higher prices. This has occurred because their customers focus on the price of the ticket to make their buying decision, not the total cost of travel. And, once you have selected the airline, you are stuck with the add-on fees.

Do you bundle your services and present a finished part price or do you unbundle add-on services such as finish/coating, and so on. Most shops try to provide one-stop service that is easier for the customer, and therefore, their pricing is bundled. However, if you are not making much money on add-on services, you have to outsource anyway, you may be better off unbundling the pricing so your customers can see what the add-on services actually cost. They may be able to offer a better solution so you can still provide a one-stop service.

What about volume pricing? Most shops offer lower prices for more volume—no surprise there. But, have you considered offering pricing for annual volume or for a blanket purchase order with scheduled releases? How about “volume” pricing where the volume is total units to be produced, not just units of the same item? Many customers won’t give all of their business to one shop, but you must focus on increasing your share of their business, at least for the work you want to do.

Another volume pricing strategy often involves changing the price “break points.” Some shops will have pricing at 1-24, 25-99, 100-249, and so on. You can increase your prices by leaving the prices the same, but changing the break points. For example, 1-14, 15-34, 35-74, and so on will effectively raise prices in a not-so-visible way.

If you deal with big companies that pay slowly, raise your prices and offer a discount back to the original price if they pay promptly. Conversely, if you deal with smaller customers where your cash position is stronger than theirs, the same approach can work, but in reverse. They will value the longer payment terms, so offer them net 60 on the higher prices.

Another area often overlooked by many shops is pricing versus lead time. You’ve probably heard the expression, “Lack of planning on their part does not constitute an emergency on your part.” However, that does not mean you have to charge the same price. Waiting until the emergency occurs and trying to charge more for rapid delivery can appear to be gouging or taking advantage of the customer’s situation. However, if you spell out in your terms and conditions from the beginning what your premiums are for shorter lead times, then when those situations occur, you can honor their needs (assuming you can) while simply confirming the previously agreed upon price. In my experience, getting agreement on delivery time premiums is easier when they are not thinking they will ever need it.

Most shops price based on cost. Your pricing strategies need to be based on the value you provide the customer. What do you do better than most? What is that worth to the customer? We have talked previously about focusing on the value you provide rather than the cost of doing it. This is mandatory for optimizing your pricing.

My friend Chuck Reaves, motivational speaker, has said on many occasions that no customer ever said, “Your price is too high” and meant it. That does not stop them from asking for lower prices or pushing back when you try to raise your price. Understand the value you provide from the customer’s perspective, and use these and other strategies to get the highest prices you deserve.